What Lies Ahead in 2022 and Beyond
More like a gambling addiction than an investment strategy... What lies ahead in 2022 and beyond... The map and the territory... How you're most likely to get rich in stocks... Four ways to take less risk and earn higher returns today... Next week on Investor Hour: Top 10 Potential Surprises for 2022...
With 2021 nearly behind us, it's time to look forward to 2022 and beyond...
In my two most recent Digests, I discussed the past and the present – what happened (and didn't happen) this year and my "sense for where we stand" today.
Now, it's time to think about what may lie ahead.
That's hard to do, though, because the future hasn't happened yet... It doesn't exist.
But today, in my final Digest of 2021, we'll face this challenge head-on. We'll discuss how to think about the future – and more important, what we can do about it.
Regular Digest readers know my mantra for investors regarding the future...
"Prepare, don't predict."
On a recent episode of the Stansberry Investor Hour podcast, I went even further... I discussed how an investment strategy based on predictions is more like a gambling addiction.
Still, investing means committing capital today to earn a return in the future. You can't be a successful investor without acknowledging that fact and finding an effective way to look forward in time.
Fortunately, we don't need to look far to find a single, simple concept that lights the way forward. All competent investors cite it as an all-important facet of a successful strategy.
I'm talking about risk.
Investing means putting capital at risk to earn a return.
Misunderstand it... and you could suffer a catastrophic loss. Master it... and your future gains are as close to a sure thing as you'll find in the financial markets.
Understanding, recognizing, and controlling risk is how successful investors look into the future.
Investors contemplating risk will eventually arrive at two questions...
- What is likely to happen?
- What is unlikely to happen?
In terms of the first question, one thing that always seems to be on investors' minds is whether or not stocks will rise or fall in any given year.
Based on what has happened throughout history, stocks are more than twice as likely to rise as to fall over the course of any given year, on average. And based on that same history, stocks are also likely to generate a positive return over the long term...
From 1928 to 2021 (as of Monday's close), the benchmark S&P 500 Index finished each year higher than it started an average of seven out of 10 times per decade. I'm not including dividends, because yields today are tiny and investors don't lose sleep over them anyway.
The S&P 500 has risen at 6.1% per year since 1928. That doesn't look like much at first glance... But if you start with $10,000 and earn 6.1% annually for 50 years, your nest egg will grow to more than $193,000.
That's not bad for sitting back and doing nothing.
It's not hard to see how someone earning even a modest salary could become a millionaire over a lifetime of investing. Given that knowledge, I can only conclude that...
Keeping some amount of capital invested constantly in a basket of well-chosen equities is perhaps the easiest way for most people to grow substantial wealth with their savings. (We'll talk about the importance of "well chosen" another day.)
The past is not the future, just as a map is not the territory it represents...
But both the past and the map can still help get us to where we want to go.
And in the end, the past is our only reference point for mapping out the future.
Many unpredictable events have changed the course of equity returns over the years – including wars, inflation, laws and regulations, taxes, changes in taste, and technology.
Yet as that all played out, human beings built, worked, and innovated... And in the end, it generated positive returns for folks who looked ahead and kept their capital invested for the long term.
We have no reason to believe 2022 should be any different... on average.
Funny thing about averages, though...
Perhaps you've heard about the 6-foot-tall man who drowned crossing a river with an average depth of 5 feet. Such a river, of course, could easily contain an area deeper than 6 feet – potentially much deeper.
It's the same with the stock market...
The S&P 500 has climbed 6.1% per year, on average, since 1928. However, that average includes 30 years in which the index ended the year lower than it started.
It's great, on average... But it can still feel like you're drowning during some years.
For example, the S&P 500 fell in nine of the 13 years from 1929 to 1941. And the index has fallen more than 20% in a single year six times since 1928.
Historical equity valuations suggest that the S&P 500 is likely to generate flat to negative returns over the next 10 to 12 years if purchased at current prices.
In other words, as I've said many times, U.S. stocks are more expensive than ever.
With U.S. stocks so expensive today, it tilts the odds in favor of a decade of poor returns more than usual...
Given that predicting tops is off the table, how can you prepare for a year of negative returns – or perhaps simply a year of lower positive returns and greater volatility?
You do it mostly by staying away from the "fads" – the hot stocks that are soaring out of sight beyond all connection with the underlying fundamentals of the business.
We've mentioned the "meme stocks" like Tesla (TSLA), AMC Entertainment (AMC), and GameStop (GME) before. But it's not just those three companies... During a full-blown speculative mania like we're living through today, many stocks should be avoided.
Avoiding the riskiest stocks – and selling them if you currently own them – prepares you for a difficult year by helping to raise your cash balance.
Nobody in the financial industry has any incentive to tell you to leave your money in cash... But I'm not worried about selling you anything, so I'm happy to be the one to do it.
Avoiding stocks like these also reduces your risk... After all, you're eliminating your exposure to the stocks most likely to suffer the biggest declines when the good times end.
An easy way to show this is to compare the declines of the S&P 500, the tech-heavy Nasdaq Composite Index, and the Dow Jones Industrial Average during the dot-com bust...
As you can see, the Nasdaq fell 78% from its highest close in March 2000 through its lowest close in October 2002. That's a much bigger decline than the S&P 500's fall of 49% and the Dow's drop of just 38% over similar periods during the dot-com bust.
The dot-com boom mostly involved technology and telecom stocks... And when the music stopped, the Nasdaq suffered the worst damage because it was loaded with the riskiest bubble-era stocks. The other indexes didn't fall as much because they were less exposed to the worst-performing bubble names.
It's still no fun watching your equity portfolio decline 38% or 49% over two and a half years... But that's far easier to stomach than a 78% drop. And remember, the Nasdaq didn't eclipse its dot-com peak until 2015. The S&P 500 and Dow took two years less to do so.
But we must keep something else in mind...
Most people don't invest once while they're young, then wait 50 years to collect on their returns. Self-directed investors are constantly putting in new capital over many decades.
Riding out a huge market decline is no fun... But since we're always looking for ways to put money to work, bear markets set us up for the biggest returns we'll earn in our lives.
In other words, buying great businesses in bear markets is how you're most likely to make the biggest money in stocks... Name any great, multibagger, home run stock from the past several decades and a quick look at its price chart will prove that assertion.
The same has been true for passive, index-focused investors, too...
If you bought the S&P 500 at the top of the housing bubble in October 2007, you've made almost 200% since then... You've nearly tripled your money over the past 14 years.
That's a good return. But if you kept putting money to work throughout the ensuing bear market, you've made more than 500% on capital deployed near the March 2009 bottom.
My point can't get much clearer... If you stay focused on the long term and buy stocks as they go on sale during a steep decline, you'll set yourself up to grow substantial wealth.
Investing in stocks is like anything else in life... The longer you do it, the more you get out of it. But unlike sports and other games, you can continue to get better at investing until late in life.
The worst way for an investor to view the future is to let fearing it paralyze him... Investment success requires courage, just like everything else in this life that's worth doing.
The current episode is mostly a technology boom – just like the dot-com era...
You can see what I mean by looking at the returns of the major indexes since March 2009...
Although the past doesn't always repeat, it often rhymes... So given what happened in the dot-com bust, there's likely more downside potential in the Nasdaq at current levels than in the other indexes.
If you're looking ahead and wondering what could possibly unseat tech stocks from their decade-plus status as market leaders... look no further than inflation. As a research report from investment giant Fidelity stated earlier this month...
The tech sector has tended to underperform during inflationary periods regardless of the health of the economy. Since 1962, technology has performed poorly relative to the broad market during both inflationary economic booms and inflationary busts (also known as stagflation)...
So even if a bear market doesn't develop in 2022, tech stocks could still struggle.
If you're a mostly passive investor, you can easily prepare for that... Rebalance your 401(k) account to reduce Nasdaq exposure relative to the S&P 500, Dow, and Russell 2000. That will reduce your downside risk from tech stocks, whether a bear market occurs or not.
In a bona fide bear market, most stocks will fall. Gold, bitcoin, and possibly bonds will fall as well with investors everywhere hitting their panic buttons and trying to raise cash quickly.
That's normal.
And at those panicky moments, the only true diversifiers will be cash and put options.
I've already addressed cash today. But for now, I'll leave the options-trading advice to our trusted experts here at Stansberry Research – folks like Retirement Trader editor Doc Eifrig, DailyWealth Trader editor Ben Morris, and Ten Stock Trader editor Greg Diamond.
So as we prepare to start a new year, what can we do about everything we've discussed so far today?
Looking ahead to 2022 and beyond... we need to stay invested for the long term. But at the same time, we must be cautious about the increased likelihood of poor returns from current valuations. And selling and avoiding the bubbliest stocks will help us raise cash and reduce portfolio risk.
Besides avoiding bubbly stocks and raising cash, you can do something else today. I hope you'll agree that it's a lot more fun, too... Buy what others have sold and forgotten about.
I've mentioned my two favorite opportunities in this regard before, and I'll keep doing so until they're no longer such a screaming good deal.
My two favorite groups of stocks today are cannabis and silver stocks.
Fortunately for Stansberry Research subscribers, we offer publications that focus on both of these corners of the markets – Cannabis Capitalist and Silver Stock Analyst.
I interviewed Cannabis Capitalist editor (and race car driver!) Thomas Carroll on this week's episode of Stansberry Investor Hour. The cannabis sector entered a bubble earlier this year... But these stocks have fallen so far that it's now one of the world's best value plays.
During our chat, Thomas shared a few stocks that he likes today. And he made one thing clear to Investor Hour listeners... "You must own some of these stocks right now."
I also interviewed Silver Stock Analyst editor Garrett Goggin recently, as I mentioned in the December 10 Digest. Garrett also highlighted several stocks during our conversation. In fact, in that episode, Garrett named his favorite royalty-like company in the sector today.
Most Digest readers know how much we like royalty companies at Stansberry Research. They require less capital than mining companies... And they get paid off the top of a miner's revenue. So even if the mining company isn't profitable, the royalty still must be paid.
Before we wrap up today, let's sum up my look ahead at 2022...
I've named four actions a self-directed investor should consider taking immediately...
- Raise cash
- Avoid bubbly, speculative stocks
- Buy cannabis stocks
- Buy silver stocks
I've also named one action that passive investors could take in their 401(k) accounts. It's an easy way to reduce risk while remaining focused on long-term compounding...
- Rebalance your 401(k) to reduce Nasdaq exposure
By doing that, you'll reduce your downside risk from tech stocks whether or not a bear market occurs in 2022.
Active and passive investors alike probably shouldn't do much with their core holdings in most years. But adjusting exposures to take advantage of the opportunities presented by market cycles can help you earn better returns with lower risk... And we all want that!
If you want a deeper look forward to 2022, I encourage you to do one final thing in 2021...
Listen to this week's episode of the Stansberry Investor Hour podcast.
In addition to talking with Thomas, our cannabis expert, I also deliver my "Top 10 Potential Surprises for 2022." Again, they're not predictions... They're events that investors don't seem to be prepared for, given current market conditions.
My Top 10 Potential Surprises for 2022 cover stocks, bonds, bitcoin, silver, gold, inflation, Tesla, oil, and volatility. Enjoy!
The mailbag is quiet ahead of the Christmas holiday. Next week, we'll share a special, five-part series looking back at 2021. And please keep sending your thoughts, comments, and observations on the markets to feedback@stansberryresearch.com.
Happy holidays,
Dan Ferris
Eagle Point, Oregon
December 24, 2021